Leasehold and Freehold Reform Bill

Debate between Matthew Pennycook and Richard Fuller

Report stage
Tuesday 27th February 2024 Commons Chamber

[Matthew Pennycook (Greenwich and Woolwich) (Lab)]

I start by declaring an interest: my wife is the joint chief executive of the Law Commission, whose work in this area I intend to reference in my remarks.

I rise to speak to the amendments and new clauses that stand in my name. Before doing so, I would like to put on record my thanks to all those hon. Members who served on the Public Bill Committee for so ably scrutinising the many technical and complex provisions that the Bill contains. There were, as one would expect, differences of opinion and emphasis, but it was also evident that there is a shared recognition that the Bill can and should be improved further, and an unusual degree of cross-party agreement as to some of the ways that might be achieved.

Despite reams of Government amendments tabled in Committee and for our consideration today, this Bill remains a distinctly unambitious piece of legislation. That is a matter of deep regret to those on the Labour Benches, not only because the Government’s paucity of ambition will see exploited leaseholders wait even longer for the current iniquitous leasehold system to be ended, but because it is also manifestly clear that there is widespread support across the House to go much further than this limited Bill does. Responsibility for the fact that the Bill does not contain so many of the commitments that successive Conservative Secretaries of State have made over recent years, not least in relation to the promised widespread introduction of the commonhold tenure, ultimately lies with Ministers. They had the opportunity to bring forward bold leasehold and commonhold reform legislation, and they made a political decision not to do so.

Although the Opposition appreciate the understandable desire of many leaseholders to see this Bill completely revamped so that it lives up to the many weighty promises made by the Government since 2017, we made clear at the outset in Committee that we did not intend to try to persuade Ministers to radically overhaul it by means of the many hundreds of amendments that would be required to implement all the Law Commission’s recommendations on enfranchisement, right to manage and commonhold. That remains our position. Whether this Bill receives Royal Assent or not before this Parliament is dissolved, a Labour Government will have to finish the job of finally bringing the leasehold system to an end by overhauling it to the lasting benefit of leaseholders and reinvigorating commonhold to such an extent that it will ultimately become the default and render leasehold obsolete. I reassure leaseholders across the country that we are absolutely determined to do so.

We recognise, however, that this limited Bill will provide a degree of relief to leasehold and freehold homeowners in England and Wales by giving them some greater rights, powers and protections over their homes. For that reason, we are extremely pleased it will complete its passage today, but we are determined to send to the other place the most robust piece of legislation that we can. That means rectifying the Bill’s remaining flaws and incorporating into it a select number of measures to further empower leaseholders and improve their rights. With that objective in mind, we have tabled a series of amendments and new clauses for consideration today. That they are almost identical to a number of those we discussed at length in Committee is a deliberate choice that reflects not only the importance we place on the changes they seek to secure, but the distinct lack of convincing responses from the Minister in Committee as to why the Government felt they needed to resist them.

Part 1 of the Bill concerns leasehold enfranchisement and extension. In seeking to implement the small subset of reasonable and proportionate Law Commission recommendations, it is almost entirely uncontentious. However, we believe that several provisions in this part are defective. We sought to remedy their deficiencies in Committee and we have tabled a number of amendments in an attempt to do so again.

Amendments 4 and 5 concern arguably the most significant provisions in this part when it comes to ensuring that the process of extending a lease or acquiring a freehold is as cheap as possible for existing leaseholders—namely the proposed new valuation process as provided for in clauses 9 to 11 and schedules 2 and 3. The current valuation method has a number of manifest flaws, and we fully support the new method as proposed in the Bill. However, with the applicable deferment rate becoming the primary driver of price to be paid in enfranchisement or extension claims under the new method, as a result of the abolition of marriage and hope value and the peppercorning of ground rents in the valuation calculation, we believe it is essential that it is set in a way that is fair to leaseholders. While the Government ostensibly agree, there is nothing on the face of the Bill to ensure that that will be the case and we therefore remain convinced that this Government, or a future one, could be lobbied by vested interests to set a deferment rate that will be punitive to leaseholders.

In resisting our efforts to amend the Bill in Committee to guard against such an outcome, the Minister argued that the Secretary of State must have flexibility to make decisions on the rate or rates. We agree; we are not suggesting that we bind the hands of Ministers by prescribing the rate or rates on the face of the Bill, but we do believe that the legislation should be amended to place a clear obligation on the Secretary of State to set a rate or rates with the overriding objective of encouraging leaseholders to acquire their freehold at the lowest possible cost.

[Richard Fuller]

The shadow Minister is right that there was a lot of consensus in Committee, so I hope he will not mind me probing him on some of the language he just used about the issue of setting rates. We all want to see what the Government do on deferment and capitalisation rates, but the shadow Minister used the term “punitive to leaseholders”. Does he accept that already embedded in the issues about ground rents and the changes here is a substantial transfer of value from freeholders to leaseholders, that the people who are more likely to suffer from punitive behaviour are those who entered into contracts historically from the freeholder side expecting that those values would be considered, and that it is a public policy decision that will change the value in those contracts?

[Matthew Pennycook]

I understand the hon. Gentleman’s point, which he made in Committee as well, if I am not mistaken. We very much think the risk is on the other side of the scale—that is, that a Government would be tempted to set a rate that is damaging to leaseholders as a result of being lobbied by vested interests. While there is a balance to be struck, we think it is right that we put on the face of the Bill that the objective in setting the deferment rate as part of the premium calculation must be to ensure that leaseholders acquire their freehold at the lowest possible cost. Amendments 4 and 5 would ensure that that is the case and I commend them to the House.

Part 2 of the Bill makes changes to other rights of long leaseholders. It contains the four clauses in the Bill that implement Law Commission recommendations on the right to manage, several of which we have sought to improve, as well as clause 21, which makes provision for a new enfranchisement right to extinguish a ground rent without having to extend a lease. We still have absolutely no idea how this clause—or clauses 7 and 8, for that matter—will interact with any proposals that might emerge from the recently closed consultation on restricting ground rents for all existing leases. The Minister must provide further clarification on that; it cannot be right that we could be dealing with such a significant issue when we get to ping-pong stage, in due course.

We very much welcome the intent of clause 21 and schedule 7, which it gives effect to. Even if unamended, they will ensure that some leaseholders can enjoy reduced premiums and secure nominal ground rent ownership of their properties without the need to go through the challenge and expense of repeated lease extensions. However, we remain unconvinced by the Government’s proposed conferral of this new right only on those leaseholders with leases with an unexpired term of more than 150 years. In resisting our attempt to remove the 150-year threshold from the Bill in Committee, the Minister essentially made two arguments. The first was that there is a need to

“put a finger on the scale”

somewhere. In other words, the Government take the view that the new right must be restricted based on lease length. The second argument was that in determining the threshold for restriction, the primary consideration should be which leaseholders are

“unlikely to be interested in, or do not need, a lease extension.”––[Official Report, Leasehold and Freehold Reform Public Bill Committee, 25 January 2024; c. 271.]

We do not believe that either argument is particularly strong.

First, any long lease threshold for the new right is ultimately entirely arbitrary, as evidenced by the fact that the Government chose a different threshold from the one recommended by the Law Commission.

Secondly, there is a principled argument that we should trust leaseholders to make decisions based on what is right for them and their individual circumstances, rather than denying a broad category of leaseholders a new statutory right on the basis that Ministers know best what is in their interest—a viewpoint that we would have assumed those on the Conservative Benches would support.

As I put it to the Minister in Committee, there could be all sorts of reasons why someone with a lease shorter than 150 years might want to buy out only their ground rent, including simply that they are unable to afford the premium required to secure a 990-year lease under clauses 7 and 8. Denying them that right on the grounds that other leaseholders might advertently or inadvertently disadvantage themselves by using the new right to extinguish only their ground rent strikes us as overly paternalistic and misguided.

We remain of the view that there is a strong case for simply deleting the 150-year threshold entirely given that the “remaining years” test that applies is arbitrary and that the most common forms of lease are 90, 99 and 125 years. Amendment 8 would do so, thereby making the new right to replace rent with peppercorn rent available to all existing leaseholders. I commend it to the House.

Part 3 of the Bill contains a wide range of measures relating to the regulation of leasehold. We have tabled several amendments designed to strengthen the provisions in it. Arguably, the most important are amendment 10 and new clause 3, concerning litigation costs. Although we support the aim of scrapping the presumption that leaseholders will pay their freeholders’ legal costs when they have challenged poor practice, we believe that, in merely limiting the ability of landlords to do so, the Government are creating an incentive for freeholders to litigate in a way that is likely to erode the general presumption they are seeking to implement.

As we argued in Committee, a far more sensible approach would be to legislate for a general prohibition on claiming litigation costs from leaseholders, and then to provide for a limited number of defined exceptions to that general rule by means of regulations—for example, in cases in which the landlord is a leasehold-owned company, or in which the costs are, in the opinion of the tribunal, reasonably incurred for the benefit of the leaseholders or the proper management of the building. Taken together, amendment 10 and new clause 3 would provide for that approach by leaving out clause 35 and replacing it with a new clause that provides for a general prohibition on claiming legal costs from tenants, and for a power to specify classes of landlord who will be exempted from it. I commend them to the House.

Mr Deputy Speaker, we want to see a number of other changes made to the Bill to provide leaseholders with better protection in law and to pave the way for a commonhold future. To that end, we have tabled amendments and new clauses to, among other things: abolish the draconian rent charge remedies provided for by section 121 of the Law of Property Act 1925; provide for mandatory residents’ management companies in new blocks of flats; establish a right to manage regime for residential freeholders on private or mixed-use estates; bring forward legislative options to facilitate leaseholders in new blocks of flats being granted an automatic share of freehold; and regulate managing agents.

Of particular importance to us is the need to ensure that the Bill abolishes forfeiture and the windfall it provides to freeholders. As we argued in Committee, forfeiture is a wholly disproportionate and horrifically draconian mechanism for ensuring compliance with a lease agreement. Over the course of nearly a century, this House has taken intermittent steps to tighten the laws of forfeiture, yet its continued use and the chilling effect that results from its mere existence continues to put landlords in a nearly unassailable position of strength in disputes with leaseholders.

The Opposition are not suggesting for a moment that this House abolishes the right of forfeiture in relation to residential long leases and replaces it with nothing. There must be effective means of ensuring compliance with a lease agreement, and we are more than willing to work constructively with the Government to determine what alternative arrangements are needed to deal with breaches of covenant or unpaid arrears. But forfeiture operates to the prejudice of leaseholders; it cannot be justified, and we must use the Bill finally to do away with it. We believe there is broad consensus across the House for grasping the nettle and abolishing forfeiture, and new clause 5 would do so, and—notwithstanding the very positive noises that we heard from the Minister—I urge hon. Members from across the House to support it.

Finally, let me turn to the 100 Government amendments to the Bill that were tabled last week, 29 of which were submitted just before the deadline on Thursday. In doing so, I feel I must put on record once again the Opposition’s intense frustration at this Government’s continued practice of significantly amending legislation as it progresses through the House. The sheer volume and complexity of amendments that this Government now routinely table to their own legislation represents a departure from established practice and one that acts as a serious impediment to hon. Members effectively scrutinising legislation, and increases the risk that Acts of Parliament contain errors that subsequently need to be remedied.

The Government amendments that have been tabled for consideration today fall into three broad categories—namely, shared ownership, building safety and new leasehold houses. I will take each in turn, starting with shared ownership. Although I am increasingly personally of the view that there is a growing case—one that is reinforced by the treatment of shared ownership in the Bill—for primary legislation to address various issues arising from shared ownership as a tenure, Government amendments 24 and 29, which relate to it, are not contentious and we support them.

Leasehold and Freehold Reform Bill (Tenth sitting)

Debate between Matthew Pennycook and Richard Fuller

Tuesday 30th January 2024 Public Bill Committees

[Matthew Pennycook]

I thank the hon. Gentleman for that helpful intervention. I hope that I do have that effect, and that he can use his good offices to persuade the Minister of the merits of adopting new clause 1.

[Richard Fuller (North East Bedfordshire) (Con)]

The shadow Minister is making a good point, but to play the cynic on this issue, there is a difference between things that could take place and things that are taking place. What is the evidence? We should probably get rid of this latent power in any case, but how often is the power being used in practice? Is this a real thing that is happening?

[Matthew Pennycook]

I thank the hon. Gentleman. If he allows me to develop my case, I will address that very point, which was well made.

Not only is the potential penalty for a breach incredibly draconian in the circumstances in which it is used, but even in instances in which a lease is not terminated, with the landlord gaining the financial benefit of any capital loans attached to it, the laws of forfeiture can lead to a significant financial loss for leaseholders. Take the following scenario. For whatever reason, a leaseholder accumulates a small arrears—perhaps a demand has not been received—and the freeholder or managing agent issues reminders, which add to the initial debt. That debt is then handed over to a debt collector, whose means of remuneration incentivise them to pursue it aggressively. The leaseholder might then attempt to pay, but they also have to find the money to cover large legal costs. If there is a mortgage, the bank is often drawn in to secure its interest, so a compulsory loan is added to the leaseholder’s account. In our view, it is the lack of any proportionate relationship between a breach of a lease and its consequences that makes forfeiture so unjust.

Since 1925, this House has regularly taken steps to make it more difficult for a freeholder to successfully forfeit a lease. For example, the Housing Act 1996 and the Commonhold and Leasehold Reform Act 2002 introduced prohibitions on the serving of a section 146 notice under the Law of Property Act 1925 in relation to service charges and breach of a covenant, respectively, in instances in which the amount payable has not been determined. Those were not the first attempts to constrain the laws of forfeiture. History shows that Parliament has returned to the matter every few decades in an attempt to mitigate forfeiture’s manifest injustices. Despite the laws of forfeiture being made stricter, a great many freeholders and managing agents still routinely use forfeiture powers as a first resort when seeking to recover alleged arrears of payments from leaseholders, and they rely—this is in some ways the more important point—on the mere threat of forfeiture, and the financial risks it presents, to deter leaseholders from disputing any unreasonable costs and defending claims.

Those who advocate retaining forfeiture often argue that it is a minor issue that does not affect many leaseholders. However, although termination of a lease under forfeiture may be relatively rare—I deliberately use the word “may”, because His Majesty’s Courts and Tribunals Service does not track the number of cases—evidence from across the country shows hundreds of cases and scores of outright forfeitures on average each year. As I said, the threat is as damaging as the use of the power, because it puts landlords in a nearly unassailable position of strength in disputes vis-à-vis leaseholders, which is why forfeiture is routinely threatened in money disputes.

Because the law of forfeiture remains so manifestly unjust, despite successive attempts to render it more palatable, there have been many calls over recent decades for more wholesale reform. For example, hon. Members may know that in 2006 the Law Commission proposed abolishing the current law of forfeiture and replacing it with a statutory scheme for the termination of tenancies. It even drafted legislation, the Termination of Tenancies Bill, to implement that proposal. Yet nothing has been done. Indeed, the relevant section of the Law Commission’s website states—this amused me—that, 18 years on,

“We are awaiting the Government’s response to our recommendations”—

eighteen years and counting.

There is, of course, a need to carefully balance the rights and responsibilities of landlords and leaseholders, and there must be effective means of ensuring compliance with a lease agreement, but those means must be appropriate and proportionate to the breach in question. We can debate precisely what alternative arrangements are needed to deal with breaches of the covenant or unpaid arrears, whether orders of some kind are necessary to sell a property when a debt is not paid, and what kind of measured method is appropriate to removing problem tenants from a building—we heard about that in our oral evidence sessions. The starting point, however, must be that we finally grasp the nettle and abolish forfeiture, and the windfall it provides, once and for all. It operates to the prejudice of leaseholders and it cannot be justified.

The Secretary of State made clear on Second Reading that he was open to this Committee looking at how we end the abuse of forfeiture. I believe there is a broad consensus across the House—indeed across this Committee —that we should consign it to history, even if there is a debate about precisely what replace it with. Following the point made by the hon. Member for Walsall North, I sincerely hope that the Minister will not disappoint us and the many thousands of leaseholders who support the abolition of forfeiture by resisting this new clause out of hand. I very much look forward to his response.

Leasehold and Freehold Reform Bill (Ninth sitting)

Debate between Matthew Pennycook and Richard Fuller

Committee stage
Tuesday 30th January 2024 Public Bill Committees

[Richard Fuller]

It is a pleasure to serve under your chairmanship, Sir Mark. I remind colleagues that we have moved from the clauses that relate to what was termed the “feudal” system of leasehold to the rather more modern problem of estate management charges, which in large part, although not exclusively, are incurred by those who own their homes. Essentially, the charges have arisen because of issues to do with adoption by local authorities. They are charges for a range of services in what might be termed, but are not necessarily, public areas, and for what might be, but are not necessarily, services or provisions that would normally be provided by a local authority.

It is worth bearing in mind how rapidly the issue of estate management charges has grown. From being essentially non-existent, or at least very rare, I think the charges now cover at least 1 million or 1.5 million homeowners—perhaps the Minister will tell us it is an even higher number. One issue is that we are essentially creating a two-tier society of council tax payers: people who pay council tax once to cover a range of public services, and residents in parts of our country who pay for those services twice—once through their council tax and again through their estate management charges.

The provisions in part 4 deal with a number of changes that seek to improve the rights of those subject to estate management charges and to improve access to redress. I commend a number of my local residents and councillors, most importantly Councillor Jim Weir of Great Denham, as well as 30 of my Conservative colleagues who wrote with me to the Prime Minister and Secretary of State to ask them to include the provisions in the Bill. I am grateful to them for doing so. Most particularly, I thank the former Minister—my hon. Friend the Member for Redditch—and the current Minister for their help and guidance on these matters. The provisions will enable us to make a great amount of progress. However, it is clear—and it was clear from the evidence the Committee received—that there is another path, or at least it is clear that the public also desire to abolish or reduce the current system of estate management charges, rather than improving it and the rights that people have. That is what the amendment seeks to achieve.

At issue is the matter of adoption. In the summary on page 4, paragraph 2 of the Competition and Market Authority report that looks into estate management charges and other issues, it states that

“evidence gathered in our market study to date has shown that, over the last five years or so, amenities on new housing estates that are available for wider public use (ie not for the exclusive use of households on the estate), are increasingly not being adopted by the relevant authority. This appears to be driven by the discretionary nature of adoption, housebuilders’ incentives not to pursue adoption and by local authority concerns about the future ongoing costs of maintaining amenities”.

That gets to the crux of the issue. The decision process for creating estate management charges takes place in a cosy discussion between the developers of new estates and the local authorities, both of which have an interest in ensuring that they are not the ones to carry the cost for a range of communal services. Guess who ends up paying the bill? It is homeowners up and down the country, who have no role in that cosy discussion. I wish to influence that cosy discussion through my amendment.

It is tricky to change the process of adoption, and I think you would consider it out of scope, Sir Mark, if we sought to do so in the Bill. In the evidence session, I heard colleagues talk about some of the risks involved in leaving councils with unadoptable roads and poor-standard infrastructure that the council tax payer has to pay to bring up to standard. No one on the Committee wishes to see that happen. My amendment would not force adoption, then, but essentially take the payer—the householder or homeowner—out of the equation for paying for those costs. It would exclude services or works that would ordinarily be provided by local authorities so that they would not count as costs that could be incurred by estate management charges.

My hope is that the amendment would pour a dose of reality on to developers by saying that they could no longer pass the buck for the costs of poor-standard infrastructure used by the public to homeowners on their estates. They would have to bring them up to standard, and then councils could adopt them.

[Matthew Pennycook (Greenwich and Woolwich) (Lab)]

It is a pleasure to continue our line-by-line consideration of the Bill with you in the Chair, Sir Mark. I rise to speak to amendment 150, tabled in my name and that of my hon. Friend the Member for Weaver Vale. As we have heard, part 4 of the Bill deals with the regulation of estate management. The hon. Member for North East Bedfordshire provided an extremely comprehensive overview of the problem and its prevalence.

The distinct set of problems faced by residential freeholders on private or mixed-tenure estates that part 4 seeks to address is well known and well understood. Those problems include: excessive or inappropriate charges levied for minimal or even non-existent services; charges imposed for services that should by right be covered by council tax; charges that include costly and arbitrary administration fees; charges hiked without adequate justification; and charges levied when residential freeholders are in the process of selling their property.

In addition to a general lack of clarity and transparency about how estate management charges and fees are arrived at and how they break down—these problems are not dissimilar to those experienced by long leaseholders in respect of service charges—residential freeholders on privately owned and managed estates clearly suffer from inadequate transparency in other unique respects. For example, as I have said in past debates on the subject in the House, it would appear to be fairly common for residential freeholders not to be notified of their future liability for charges early in the conveyancing process; many learn of their exposure only at the point of completion. Even in instances in which residential freeholders are notified about their future liability in good time, many have to confront the fact that their contracts do not specify limits or caps on charges and fees.

There is clearly a distinct problem with management fragmentation on many privately owned estates that have been constructed throughout the country in recent years, with residential freeholders even on relatively new estates frequently having to navigate scores of management companies, each levying fees for services in a way that further exacerbates the general lack of transparency and potential for abuse that they face in respect of charges and fees. Underpinning all those issues of concern is a fundamental absence of adequate regulation or oversight of the practices of estate management companies and the fact that residential freeholders currently do not enjoy statutory rights equivalent to those held by leaseholders.

There has been a broad consensus across the House for some time that residential freeholders on new build private and mixed-tenure estates require greater rights and protections, and the Government have recognised publicly—for at least six years, by my count—that they need to act to address the range of problems that freeholders face. Labour therefore welcomes the Government’s decision to use the Bill to create an entirely new statutory regime for residential freeholders based on leaseholders’ rights and is fully supportive of the intent behind the provisions in this part of the Bill.

Although part 4 sets the broad framework for regulating estate management, much of the detail necessary to bring that framework into force will come via regulations. We take no issue with that, and do not intend to pre-empt the regulations by attempting to prescribe a series of requirements on the face of the Bill. However, we believe that, where possible, we should seek to use part 4 not only to provide greater protection to residential freeholders who live on the estates, but to contribute to a reduction in the prevalence of such arrangements—a point that the hon. Member for North East Bedfordshire was driving at.

Although additional protections of the kind introduced under part 4 will almost certainly still be required, in its “Private management of public amenities on housing estates” working paper, published on 3 November last year, the Competition and Markets Authority stated that

“we consider that reducing the prevalence of private management arrangements would be the most direct route to address the root cause of our emerging concerns”.

The CMA made it clear in that working paper that reducing the prevalence of private management arrangements would require a mix of legislative and policy changes more fundamental than the introduction of regulatory protection, and drew attention to the fact that it would result in a wider set of consequential changes, not least the potential for

“significant impact on local authority finances and resources at a time when local authority funding is already stretched.”

That is why, while we very much sympathise with its intent of ensuring that residential freeholders on private or mixed-tenure estates are not charged for services that should by right be covered by council tax, we have reservations about amendment 145. We are concerned that it will, in effect, force local authorities to adopt public amenities on new housing estates, irrespective of circumstance, or—if compulsion is not the intent of the hon. Member for North East Bedfordshire—would see those amenities degrade and deteriorate as a result of not being maintained by either the private management company or the local authority.

[Richard Fuller]

I am grateful to the shadow Minister for his detailed look at my amendment. First, will he explain to the Committee where he sees compulsion on local authorities in the amendment? I cannot see it. Secondly, will he explain why his more material concern about the possibility of items degrading and estate management not doing anything would not be addressed by the strengthening provisions that the Government are putting in the Bill on behalf of homeowners?

[Matthew Pennycook]

Under my reading of the hon. Gentleman’s amendment, if it is ensured that services or works that would ordinarily be provided by local authorities are not relevant costs for the purposes of charges in this part, who will pick up the bill? If the local authority is not compelled to adopt the amenities, our concern is that no one will maintain them. To address his point directly, I worry that his amendment would not ensure that the private estate management company picks up the charge. I will come to why I think our amendment is a superior way of addressing this very real problem.

[Matthew Pennycook]

We are all driving at the same point. I was very much taken by the CMA’s conclusion that reducing the prevalence of these arrangements requires a combination of the mandatory adoption of amenities and putting in place corresponding common adoptable standards. If we do one without the other, we risk some unintended consequences.

My concern about the amendment tabled by the hon. Member for North East Bedfordshire is that we cannot simply remove from estate charges costs that should in an ideal circumstance be borne by local authorities and then expect the private management company to simply pick them up. I fear that the more likely scenario will be that the amenities are not properly maintained. That is a real concern, and should be for residential freeholders on the estates. As the hon. Member for North East Bedfordshire outlined, there are some good reasons why local authorities are reluctant to adopt public amenities on private or mixed-tenure estates.

[Richard Fuller]

I would hate to detain the Committee because we have a lot to go through, but let us understand the economic process here. Initially, the local authority and the developer will work out whether to adopt roads. The developer will then have to decide whether to set up an estate management company, which may or may not deliver facilities and services that would normally be covered by council tax. If the amendment is part of legislation, no property manager in their right mind will accept taking on the responsibility because they will not wish to be liable. Here is the flow of responsibility: one cannot lumber home owners with the cost, the property manager will not be lumbered with the cost for the reasons outlined—it may go bust—so the developer will then have to recognise that there is nowhere for it to turn.

[Matthew Pennycook]

We fundamentally disagree on where the logic chain leads. I do not think that, on the basis of the amendment, the developer will be forced to pick up the costs. It is far more likely that they would build below what would be considered a common adoptable standard and then leave residential freeholders to live with substandard amenities. We could debate this further, but that is my take on the hon. Gentleman’s amendment: it would not force the management companies to do that. That is a real concern.

As I said, there are a variety of reasons why local authorities often do not take on responsibility. The most common one is that the public amenities on new housing estates are not built to a determined, adoptable standard. In those circumstances, one can hardly blame the local authority in question for a reluctance to adopt roads and common services that it will have to repair and maintain a great cost. My central argument is that if we are to reduce the prevalence of these arrangements, we must ensure that we introduce a common adoptable standard for public amenities on estates at the same time as we require mandatory adoption, as the CMA advises.

--- Later in debate ---

[Richard Fuller]

I beg to move amendment 140, in clause 44, page 69, line 6, at end insert—

“(7) The Secretary of State must by regulations provide—

(a) that an estate manager’s litigation costs incurred as a consequence of an application under this section may not be recouped through the estate management charge, except where the tribunal considers it just and equitable for such costs to be so recouped;

(b) for the right of an applicant under this section to claim litigation costs incurred as a consequence of an application under this section from the estate manager, where the tribunal considers it just and equitable in the circumstances.

(8) Regulations under subsection (7) may amend primary legislation.”

This amendment would require the Secretary of State to make regulations preventing estate managers from passing their litigation costs on to residents through the estate management charge, and providing for residents to be able to reclaim their litigation costs from an estate manager.

The amendment, which is in a similar vein to the previous one, is designed to probe the Minister on whether we have got the balance right in the clause to enable effective use of the tribunal by those who would wish to bring a case against estate managers. As we heard when we discussed the clauses on leasehold, one of the biggest concerns that people have is that they will face open-ended litigation costs. In this case, the litigation costs will essentially be cycled back through the estate management charges, and therefore effectively end up being paid by homeowners on the affected estates.

Amendment 140 is designed to prevent that passing on of litigation costs. It also recognises that many homeowners may wish to take action but not have the wherewithal to pay the litigation costs. Paragraph (b) of the amendment therefore enables residents to claim the litigation costs arising from their application. I am interested in the Minister’s view on the balance of litigation in such circumstances—we have spoken about it in relation to other circumstances. I think we all want the tribunal to work, but for that to happen, people must not be put off by the fear that they may face significant direct or indirect litigation costs.

[Matthew Pennycook]

I rise to support the amendment. We discussed litigation costs in relation to clause 34; we strongly argued for a general prohibition with very limited exceptions. The hon. Gentleman is right to draw attention to the fact, which applies to part 4 as a whole, that we should not replicate the flaws of the leasehold system in the newer system of estate management charges. Our arguments in relation to the leasehold regime therefore apply equally here, and the hon. Gentleman is right to raise the point.

--- Later in debate ---

[Richard Fuller]

The Minister or shadow Minister will correct me if I am wrong, but I believe we covered issues to do with penalties earlier. The intent of this proposal is to ensure that damages in the leasehold and freehold system are the same. I therefore think I ought to ask leave to withdraw my amendment.

[Matthew Pennycook]

Without rehashing the debate on clause 30, I rise briefly to put on record that the Opposition think that the point the amendment is driving at is well made. We need equivalence between the two regimes, but we were concerned, notwithstanding damages versus penalties and all the rest, that the proposed financial penalty is too low to act as a serious deterrent to the type of behaviour that we are trying to do away with.

Leasehold and Freehold Reform Bill (Eighth sitting)

Debate between Matthew Pennycook and Richard Fuller

Committee stage
Thursday 25th January 2024 Public Bill Committees

[Matthew Pennycook]

Amendments 17 and 18 address our remaining main two concerns about the clause. The first concern, to which we will return when we consider penalties in relation to part 4 of the Bill, is that we are not convinced that a penalty cap of £5,000 is a sufficient deterrent against non-compliance with the requirements in question. For many—not all, but many—landlords, a penalty of £5,000 will be very easily absorbed. The degree to which the sanctions in proposed new section 25A to the Landlord and Tenant Act 1985 bite would obviously be improved if the penalty cap of £5,000 applied to all leaseholders partaking in any given application, rather than them having to share an amount up to £5,000 between them. My reading of proposed new section 25A(5) is that the fine would apply to each person making an application on grounds that the landlord has failed to comply with a relevant requirement, but I would be grateful if the Minister would clarify that point. Is it a single fine, or is it a fine that would apply to each leaseholder involved?

However, even if a fine of up to £5,000 could be awarded to multiple leaseholders, we still question whether it is sufficient—I think that is a point that is worthy of debate. Labour is minded to believe a more appropriate threshold for penalties paid under proposed new section 25A—I remind the Committee that penalties are awarded at the discretion of the tribunal, so they are not automatic—would be £30,000, thereby aligning penalties in the Bill with other leasehold law, such as financial penalties for breach of section 3(1) of the Leasehold Reform (Ground Rent) Act 2022. Amendment 17 proposes such a cap, although we would certainly consider an even higher limit, such as the £50,000 proposed by the hon. Member for North East Bedfordshire.

Secondly, Labour thinks that the functioning of the new enforcement regime would be improved by specifying a floor on penalties in the Bill. In making clear that non-compliance with the relevant requirements will always elicit a fine, landlords will be incentivised to comply. Amendment 18 proposes that penalties under this section must be at least £1,000, with the implication that the tribunal would determine what award to make between the range of £1,000 and £30,000 for each breach. I look forward to the Minister’s response to each amendment.

[Richard Fuller]

I am tempted to frame page 25 of today’s amendment paper, because it includes the shadow Minister’s amendment 17, which would increase the penalties from £5,000 to £30,000, and my amendment 142, which would increase them from £5,000 to £50,000. I thought it was usually the Conservative party that is pro-business and tries to keep costs on business low, but then I recalled that these penalties apply to people doing something wrong, and of course the Labour party is always soft on criminals.

Seriously, though, the shadow Minister and I have a clear intent, which I am sure is shared by the Minister. A lot of the measures in this part of the Bill are trying desperately to unpick complicated things and rebalance them in favour of people who own their own home but do not run a large business, or people with small financial interests, where there are 30 or 40 of them against one person with a significant financial interest that covers all those people. In trying to rebalance things here, we all want to ensure that these measures are as effective as possible and that there is enough encouragement to ensure that the good practice the Government want to see can be done effectively.

The concern that I share with the shadow Minister is that the current levels of penalties just look like a cost of doing business. [Interruption.] Indeed! The hon. Member for Brent North has just slapped himself on the wrist, which is probably how many businesses will see it.

Can I gird the Minister’s loins and encourage him to take up his shield and his sword of righteousness in defence of individual leaseholders and say, “This amount is too low. We shall change the legislation. This party and this Government stand to make the intent of what we will do to truly bite on those who are doing wrong”?

[Lee Rowley]

I am grateful to my hon. Friend the Member for North East Bedfordshire and the hon. Member for Greenwich and Woolwich for tabling their amendments. I share their basic conceptual desire, and that of other Committee members, for people or organisations that have done the wrong things to be held to account. There should be penalties that recognise that they have done the wrong thing. The challenge is always going to be where we draw the line.

I recognise that there are multiple parts of the menu on offer. Notwithstanding the very valid points that have been made, it is important not to lose sight of the fact that the Government are doubling the number from £2,500 to £5,000. Individual right hon. and hon. Members will take different views throughout this process and beyond on whether that is proportionate or whether it should be higher or lower. We think we have struck a proportionate balance.

I will add to the record, for consideration, the importance of the potential for unintended consequences. The response will quite rightly be that it will ultimately be for the tribunal to determine how much to apportion and how to use any changed option. There is a scenario in which the potential penalty on the freeholder, or the party being taken to the tribunal, becomes so great and the hazard becomes so visible that the freeholder starts to oppose it with even more objections, difficulties and the like.

I am making quite a nuanced argument, and Members may feel that I am overthinking this, but we have to be cautious not inadvertently to create a process that emboldens freeholders to fight even harder because of the potential hazard and because they feel that they may be exposed to a fine larger than would be reasonable and proportionate. However, I take the point about the challenge of setting the penalty in the right place. The Government’s view is that the increase from £2,500 to £5,000 is a step forward. That is what we are proposing to this Committee. As a result, we will resist the amendments.

--- Later in debate ---

[Matthew Pennycook]

The Minister’s response was quite disappointing. I think he has made it clear that it is per challenge per group, so what is the incentive for a large group of leaseholders to press the dispute if the potential amount of the share that they are going to get is £100, or even £50? It might be a low amount. [Interruption.] No, it could be. It is a share of the challenge; if there are 100 leaseholders in the challenge, they get a maximum of £5,000 to share between them unless they make multiple challenges. That is my reading of what the Minister has just said.

[Richard Fuller]

Bearing in mind that this is an intervention—

[Richard Fuller]

I think the shadow Minister is mixing two things up when he says that people get a share. The issue here is about changing the behaviour of the person who is doing wrong, not “I’m going to get this much money out of it.” The incentive is for the person who is doing wrong. Does the shadow Minister agree with the point made by the hon. Member for Brent North about clogging up the system: why would 150 people put one challenge in when they could put 150 challenges in?

[Matthew Pennycook]

I take the point, and I understand what the hon. Gentleman is driving at: there is the very real risk of clogging up the system with multiple challenges if leaseholders are sophisticated enough to understand the provisions of the clause and work out that the best thing they can do is submit multiple challenges. I do not think that most will. There is therefore a detrimental impact on the incentives for leaseholders to try to dispute these matters.

Coming back to the fundamental point of whether this will change the behaviour of landlords when it comes to compliance, though, I think the hon. Gentleman is right: the figure of £5,000 is too low. I have had this debate so many times with Government Ministers. We had it on the Renters (Reform) Bill: the maximum that local authorities can charge for certain breaches of that Bill is £5,000. Most landlords will take that as a risk of doing business.

Leasehold and Freehold Reform Bill (Seventh sitting)

Debate between Matthew Pennycook and Richard Fuller

Committee stage
Thursday 25th January 2024 Public Bill Committees

[Richard Fuller (North East Bedfordshire) (Con)]

I want to take up the point the hon. Gentleman made about the timing of the ground rent review and the implications for subsequent change in the Bill. Has the Opposition looked at what the potential legal liability might be if we move forward with this Bill without clarity on what happens on ground rent, particularly as this is retrospective legislation, and whether there is a potential liability for the taxpayer if that co-ordination does not work effectively?

[Matthew Pennycook]

We have had access to the advice and opinion of a number of organisations and individuals, which have probably been sent to the whole Committee. We have also sought to engage the opinions of many relevant experts in this area. The honest answer is that we do not know. I think the Minister himself would say openly that there is a sliding scale of risk with each of those options. I fully expect any of those options, if they are introduced, to result in litigation against the Government that seeks to take the matter to Strasbourg under the relevant rules. That has to be factored in. The Secretary of State and the Minister will be getting the relevant advice. That is why I encourage the Minister to be courageous in the option they ultimately choose. We want to strike the right balance by addressing the problem as it exists for leaseholders—that is very clear—but ensuring that whatever option comes forward can stick and is defensible. That is a conversation we will have over the coming weeks and months, because this issue is going to rumble on for some time to come.

Question put, That the amendment be made.

Leasehold and Freehold Reform Bill (Fourth sitting)

Debate between Matthew Pennycook and Richard Fuller

Committee stage
Thursday 18th January 2024 Public Bill Committees

[Matthew Pennycook]

That is all extremely helpful. Thank you very much.

[Richard Fuller]

Q Our previous witness, Mr Vitali, talked about potential concerns about the effect of regulation on people’s understanding of property rights. Do you have any significant concerns about how the Bill affects property rights? If you do, what should we do about them?

Philip Rainey: In a sense, that is a conceptual question.

Leasehold and Freehold Reform Bill (First sitting)

Debate between Matthew Pennycook and Richard Fuller

Committee stage
Tuesday 16th January 2024 Public Bill Committees

[Matthew Pennycook]

Q I suppose what I am getting at is that you would not need to withhold if the enforcement clause properly covers all the requirements therein.

Amanda Gourlay: It seemed to me that when I was reading through the clauses in the Bill that it was really section 25D that stood out as the measure that was not covered by clause 30. Clause 30 very clearly enumerates that we have section 21C(1) which is about the demand for a payment; 21E, which is about the reports—obviously, between C and E there is D, which is not in there—and then we also have 21E covered. You can literally trace those measures through. D was the one that stood out for me as being a necessity.

It might be said that that is because the provision of those accounts is outside the control of the landlord, because the accountant is the person who is preparing the accounts and they may—you will understand that I am trying to argue both against myself and for myself. There is that possible argument that may be proposed as a counter-argument to mine.

[Richard Fuller]

Q Ms Gourlay, I just wanted to go to part 4, which is about the regulation of estate management charges. You talked at the outset about bringing everything together in the process and we have heard a lot about people saying how it is all a bit of a David and Goliath process, so I wanted to get your views on how effective you think some of the measures in the Bill are when it comes to trying to help David in his battle against Goliath. We should always remember that David actually beats Goliath; I do not know why or whether that is a bad thing.

You talked also about the provision of information and how important it is that people have access to annual reports and so on. In clause 49, there is a provision whereby the failure to provide things such as annual reports will carry a charge, with a maximum charge of up to £5,000. Then in clause 51, which addresses other aspects of what should be provided—in this case, charge schedules; you said how important they were—there is a maximum charge of £1,000. Does that sound like a sufficiently large sling from which a shot may be fired, or is it just a cost of doing business?

Amanda Gourlay: Again, we come back to the fact that for some landlords, particularly those that might be management companies with no other assets, £1,000 would be crippling; effectively, that might put them into insolvency unless they can recover those moneys from other leaseholders. For other landlords, even £5,000 will be next to nothing. It is a shot across the bows; it is clear that such failure is regarded with disapproval.

What I would like to do is to take those figures back, because they appear in part 3 as well as in relation to the estate management charges. The way in which they are formulated is that they are damages that can be awarded to a tenant if they make an application, certainly on the leasehold side of things—

Freehold Estate Management Fees

Debate between Matthew Pennycook and Richard Fuller

Thursday 13th July 2023 Westminster Hall

[Matthew Pennycook (Greenwich and Woolwich) (Lab)]

It is a pleasure to serve with you in the Chair, Dr Huq. I congratulate the hon. Member for North Shropshire (Helen Morgan) on securing this important debate, and on the well argued remarks with which she opened it. I thank the hon. Members for North East Bedfordshire (Richard Fuller), and for Buckingham (Greg Smith), for participating. In their compelling and thoughtful contributions, they highlighted, among other points, how widespread across the country problems associated with estate charges and fees are.

As in the debate last week on freehold and leasehold reform, hon. Members usefully brought the issue to life by detailing the impact of estate charges on homeowners living in developments in their constituencies. The accounts we have heard today, and many others I have heard from colleagues over recent years, illustrate vividly the abundance of problems associated with new build estate charges and fees; they are well known and well understood. They include excessive or inappropriate charges levied for minimal or even non-existent services; charges imposed for services that should, by right, be covered by council tax; charges that include costly arbitrary administration fees; charges hiked without adequate justification; and charges levied when residential freeholders are in the process of selling their property.

There is often a startling lack of transparency about what services are covered by service charges, estate charges and fees charged to long leaseholders in blocks of flats, but residential freeholders on privately owned and managed estates clearly suffer from inadequate transparency in other unique respects. As was said at the start of the debate, it appears to be fairly common for residential freeholders not to be notified of their future liability for charges early in the house buying process, and many learn of their exposure only at the point of completion. I listened with great interest to the suggestions about solicitors and conveyancers. As the Minister noted in the debate last week, even where notification of future liability is given in good time, many contracts do not specify limits or caps on charges and fees.

As the hon. Member for North East Bedfordshire said, there also appears to be a particular issue with fragmentation on privately owned and managed estates, which further exacerbates the general lack of transparency and potential for abuse in respect of charges and fees. It is not uncommon in blocks of flats, particularly older ones, for ownership and management to become fragmented over time, but on privately owned and managed estates, even relatively new ones, residential freeholders frequently have to navigate scores of management companies, each levying fees for services.

Underpinning all those issues of concern is a fundamental absence of adequate regulation or oversight of the practices of estate management companies. They are deficient in many important respects, which is one reason why fundamental and comprehensive leasehold reform is urgently required. Leaseholders have at least some protections and rights that enable them to challenge the charges and the standard of service they receive, but residential freeholders have no equivalent statutory rights.

No hon. Member in this debate has claimed that the present arrangement is not inequitable, or suggested that there is anything other than a pressing need to give residential freeholders on new build estates greater rights and protections. Indeed, I would go so far as to submit that the House appears to be of one mind on the matter.

[Richard Fuller]

The shadow Minister is making some very good points, but in the spirit of evolving the debate, I want to ask him a question. My hon. Friend the Member for Buckingham (Greg Smith) talked about council tax, and mentioned, as I did, that people are being doubled charge. If there are reforms to be made, would the hon. Gentleman favour giving residents of estates that levy estate management charges the opportunity to hand back responsibility to the local authority in any circumstances?

[Matthew Pennycook]

The hon. Gentleman pre-empts a point that I will come to later. There is an issue with local authority adoption, but if he is not satisfied with my comments, he is more than welcome to intervene on me again.

The question is not, “Should we do anything?” but “Why have no concrete steps been taken over recent years to give residential freeholders the rights and protections they clearly need?” The Government have recognised publicly for at least six years that there is a problem, and that they need to act to address it. As has been said, and as the Minister clearly understands, in their December 2017 response to the “Tackling unfair practices in the leasehold market” consultation, the Government made it clear that they intended to

“legislate to ensure that freeholders who pay charges for the maintenance of communal areas and facilities on a private or mixed use estate can access equivalent rights as leaseholders to challenge the reasonableness of service charges.”

That commitment was repeated in the Government’s June 2019 response to the “Implementing reforms to the leasehold system in England” consultation, and successive Ministers have echoed it numerous times since then in the House.

Indeed, the Minister, who has responsibility for housing and planning, has been clear in several debates this year that the Government intend to create an entirely new statutory regime for residential freeholders based on the rights that leaseholders have. That would ensure that estate management charges must be reasonably incurred, that services provided must be of an acceptable standard, and that there is a right to challenge the reasonableness of charges at the property tribunal.

Given that there are almost certainly over a million residential freeholders across the country whose lives are being blighted because the practices of estate management companies are not adequately regulated, the Opposition urge the Government to find the time, in what remains of this Parliament, to legislate for freeholders’ protection. At a minimum, that legislation should ensure equivalence between the regulation of estate charges and the regulation of leasehold service charges.

This criticism is not directed particularly at the Minister, but it is incredibly frustrating for hon. Members from across the House, and for members of the public who have a stake in a given outcome, to hear Ministers assure us time and again that long overdue legislation will be taken forward “when parliamentary time allows”, especially as the House has frequently risen early in recent months because the Government’s legislative agenda is so light. There is a strong cross-party consensus on the need for urgent legislation to tackle the problem, so let us get on and progress that legislation.

Before I conclude, I will draw three important issues to the Minister’s attention, and I ask her to address them when she responds to the debate. First, on the Opposition Benches we take the view that we need to ensure that residential freeholders can more easily take control of their estate management company or companies. To be clear, that is conceptually distinct from the reform proposals made by the Law Commission in its 2020 report on exercising the right to manage.

There are a number of ways in which residential freeholders could be empowered to take over estate management functions on any given estate, but what is important at this stage is the principle. Could the Minister assure the House that when the Government legislate, it is their intention to provide residential freeholders on privately owned estates with a statutory right to manage?

Secondly, we believe that specific measures are required to protect residential freeholders from being evicted from their home due to a failure to pay estate charges and fees—or rent charges, as they were historically known. The Government committed in 2020 to repealing section 121 of the Law of Property Act 1925, which enables this practice to continue. Can the Minister confirm that the Government remain committed to doing so when they legislate?

Thirdly—this point has been raised by several hon. Members in the debate, and the hon. Member for North East Bedfordshire challenged me on it—we feel strongly that residential freeholders deserve far more certainty about the circumstances in which communal areas and amenities on privately owned estates should be adopted by local authorities, and by water companies in the case of sewage infrastructure, and the timescales within which such adoption should take place.

Let me be clear that we sympathise with local authorities that are reluctant to adopt roads and common services of poor quality. However, some authorities refuse to adopt areas and amenities, most commonly roads, that are built to an acceptable standard unless an excessive fee is paid by the developer. There is a general need to drive up built environment standards across new build estates, so that councils do not have to pick up the long-term cost of repairing and maintaining them. However, we also need further clarity from the Government on if and when local authorities are required to take forward adoption, thereby saving residential freeholders from the type of fees that the hon. Member for North East Bedfordshire referred to in his intervention. Does the Minister agree with us on that point, and if so, can she at least give us a sense of the Government’s thinking about what steps might be taken in that regard? I very much look forward to hearing the Minister’s response to those questions, and to the debate as a whole.